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From Free to Profitable: Tips for Implementing a Freemium Model

Read this guide to learn how to use freemium business models to attract and convert more customers.

As a business in a competitive marketplace, you must do everything possible to lure users, even if it means giving them a little taste of what you offer for free. As a result, one of the most successful business models for apps and software is the freemium business model.

With this model, users can use the basic features of your solution for free and upgrade to more advanced or premium features when needed. In addition, companies can use freemium models to attract and convert more customers by allowing them to try before they buy.

But is a freemium model right for your business?

Of course, freemium business models are only feasible for companies with a free version of their product and those comfortable taking a risk that users won’t purchase premium features. Keep reading to learn more about the freemium pricing model to help you determine if it’s right for your business.

What is a freemium model?

A freemium business model is a product growth strategy in which a company offers a basic version of its product for free and charges a premium for more advanced features. This type of business model isn’t new, but it’s become more popular as software companies and apps have adopted it in recent years.

The idea behind the freemium model is that businesses can let customers try the most basic features of their product and start building relationships with them in the hopes they’ll eventually convert into paying customers.

The freemium strategy model aims to decrease the customer acquisition cost by offering basic features for free, ultimately giving users a lower bar to entry to learn more about the features of a product and determine if they want to pay for better ones.

Overall, freemium business models can lower marketing costs when implemented correctly. But, they can also affect sales because users might wonder why they should pay for premium features when they’re already getting the basic features for free.

In its most basic form, the freemium model nurtures leads to increase recurring revenue without businesses necessarily having to engage those leads. Once a freemium user sees the value of a product, they’re more likely to invest in a premium account, which means lower marketing costs and higher sales.

Examples of freemium models

With a freemium model, users can try a software, app, or mobile game, knowing there’s an option to upgrade to premium features. A few freemium model examples include the following:

  • Mobile games: If you’ve ever downloaded a mobile game for free, you may have realized that they have a ton of ads, which can impact the user experience. However, with a freemium business model, a game development company can offer a premium ad-free version.
  • Spotify: Spotify is a music streaming app that works in the same way as many mobile games. With the free version, you get access to music from various artists. However, with Spotify Premium, you can access ad-free music and exclusive artist releases.
  • Trello: If you need a task management solution, Trello is one of the easiest to use. You can use the free version of Trello as a to-do list with unlimited tabs and boards. But you have to pay extra if you want to integrate Trello with other apps. This freemium model introduces users to Trello and shows them how it works. Then, when users realize they can improve their productivity even more by connecting the tool to other apps, they’ll pay more.

Pros and cons of freemium models

The freemium pricing model doesn’t work for all businesses. To try a freemium model, you’ll need a digital product with basic and premium features.

If you have a product that works nicely with the freemium model, you can use it for product pricing and lead nurturing to increase your revenue. Like all business models, the freemium model has its pros and cons.

Advantages of freemium

With the freemium model, businesses can acquire new users by offering a basic version of their product for free. This allows them to collect more data on their users to find better ways to market to them and improve their premium features.

With collected customer data, you can create more personalized marketing campaigns and build personalized products for the exact types of users you want to convert into paying customers.

Additionally, companies can increase their revenue by allowing ads on their platforms. For instance, a game developer can offer a free game with ads, collecting revenue from advertisers. Then, when users decide they no longer want the ads, the business collects revenue directly from the user.

Some of the best freemium models begin as startups to create brand awareness without the need for customer support or high costs to acquire new customers. They’re a great option for small or large businesses because they have a low bar to entry for the customer, which reduces overall marketing spend.

Disadvantages of freemium

With the freemium model, some free users may never convert to paid users. For instance, some Spotify users are okay with dealing with ads because it means getting free music. On the other hand, some consumers are willing to compromise on what they want to save money, so you can’t expect every customer to pay for premium features.

Additionally, many companies make the mistake of giving free users too many features upfront. Giving them access to great features can help them convert, but if you give them too much for free, they may not feel the need to upgrade.

On the other hand, you shouldn’t make the mistake of offering too little for free. Customers may look for another solution if your free version doesn’t provide enough value or demonstrate its features.

Difference between freemium and free trial

Freemium and free trial models seem like they’d be the same since they offer customers free products. But, free trials are time-bound. A user can sign up for a free trial lasting anywhere from a week to a month or more, depending on your business model.

Then, when the free trial period ends, the user can no longer access the premium or advanced version of the product until they pay for it.

Conversely, freemium models allow users to access some product or application features forever. Free trials give users complete access to all the bells and whistles, but only for a short period.

Both come with lower acquisition costs and an easier path to convert users into paying customers. However, you may combine both models.

For instance, you can have a free forever option with limited features and a premium version. Then, you can allow your customers to sign up for a free trial to determine whether they want to spend money on the premium version.

This gives them access to everything. Once their free trial ends, you can ask them if they’d like to keep using the premium version or downgrade to the free version.

Since many users have started with the free trial that gives them all the premium features, they can experiment with everything. It may no longer be an option for them to switch to a basic version because they already use all the premium features.

Best practices for implementing a freemium model

A freemium model can help software companies and game developers increase their leads and customers with lower acquisition costs when done right. Unfortunately, building a freemium model can be challenging, and it’s not the right option for every business.

To implement a freemium model, follow these best practices:

Offer a valuable product or service

Every freemium model requires a product-market fit.

Is there a market your product satisfies, and can you attract and convert customers? Your free and premium services should offer value and have premium and basic features. You can create a basic version of almost any software available and decide which features should be available for an additional fee.

Highlight premium features

Premium features generate revenue for your business, so you should focus on which features of your product or service you want to make premium. Typically, these features will enhance the user experience or eliminate some of the distractions of the free version, like ads.

Provide free trials

Providing free trials for the premium version of your product gives users access to all free services available to let them play around and determine if they want to spend money on your product. This offers a lower bar to entry that can help you convert more leads into paying customers.

If your customers are unwilling to pay for premium features, they can downgrade to the free forever version with limitations, which may make them realize they don’t want to lose access to all the product features.

Personalize customer onboarding

Freemium models improve customer onboarding by allowing them to try your product for free forever. As a result, there’s less pressure for them to decide after a certain time period, and they can easily discover the value of your offerings as soon as they begin using your product or service.

Since these individuals are already using your app or software, you collect data on them that can help personalize the customer onboarding process and communicate with them more effectively about the premium features that might interest them.

Simplify the upgrade process

The main goal of a freemium model is to make users want to become customers. Some never will, but you should make the process as simple as possible for those that do.

You can remind users on a free plan that they can upgrade to a free version and its benefits. For instance, you can use in-app notifications to highlight specific premium features and email reminders to demonstrate the value of upgrading.

Collect customer feedback

Collecting customer feedback is crucial with a freemium model because it allows you to learn from your customers and improve your free or paid plan.

For instance, if your free trial isn’t converting, it could be because you’re offering too many of your product's best features that customers don’t think they need to upgrade.

Boost your conversion rates with a freemium business model

According to a study by Harvard Business Review, freemium customers are worth up to 25% of paid customers because of their referrals. So, it's worth giving freemium business models a shot.

A freemium business model lets your customers try the basic features of your product or service before buying. Testing it for themselves can increase their interest and make them see the value in your paid version.

Every good freemium business model needs a website and marketing campaigns to drive downloads, leads, and sales. Use Mailchimp’s suite of marketing tools to take your freemium business model to the next level.

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